Bathla collapse exposes construction lending governance blind spot
The recent collapse of Bathla Group appears to have impacted up to 40 non-bank lenders. But regardless of whether or not your fund/s have any exposure to Bathla or its subsidiaries, it is reasonable to ask whether the risk controls being relied upon would be able to identify similar issues should they occur in your portfolio.
The gap
Investor capital is being advanced against certified construction progress on the assumption that it represents recoverable value. But progress only equals recoverable value IF that progress has been paid for, and most construction lending governance processes stop at progress certification.
In other words, all lenders verify that work has been done, but very few verify that the funds advanced against that work have actually been used to pay for it. Where certified progress remains unpaid, the expected link between borrower drawdown and a corresponding reduction Cost to Complete (a relationship on which lender risk buffers rely) is broken. The loan increases and the reported Cost to Complete reduces accordingly, but the project’s actual remaining cash obligations remain unchanged.
The project still appears on budget but is carrying a hidden funding gap – lender decisions are now being made on what are essentially incomplete & misleading risk forecasts.
Investor risk can be capped – but only some funds have chosen to implement a solution
Certified progress can now be reconciled against live payment data at each drawdown, without adding cost or operational burden to the lender.
Every fund says it has robust risk controls, but only some have chosen to independently track investor capital through to the supply chain – they now require independent verification that money has reached the subcontractors and suppliers responsible for delivering certified progress before advancing any more.
This creates a control point before the next dollar goes out. If the payment position is outside tolerance, the lender can stop or condition further funding, containing the problem before it compounds into a larger capital exposure.
This mechanism is missing from most construction lending governance processes and can be the difference between a single bad drawdown and several.
Distress itself isn’t your biggest problem – compounding capital leakage is
A borrower or builder becoming distressed is inherently difficult for a lender to predict or prevent. Allowing that distress to compound into significant leakage of investor capital is something the lender can control.
IPEX is working with a growing number of non-bank lenders to incorporate monthly payment verification into their construction lending process to further protect investor capital & returns.
If you’d like to find out more about payment verification or, find out which funds we are working with, please feel free to send me an email.
